Are Business Schools Partly to Blame for Diminishing Price Competition?

When Boston University School of Management’s Vinit Nijhawan, executive-in-residence at the Institute for Technology Entrepreneurship & Commercialization (ITEC), posted a Tweet in April about US entrepreneurship, the Wall Street Journal wanted to hear more.

His original message on Twitter was:

“US entrepreneurs have lost the desire to compete on price. Business schools are partly to blame, encouraging them to ‘go up the value chain.’”

In May, the Wall Street Journal wrote,

We asked Nijhawan, who has started up five companies and teaches an MBA course on entrepreneurship at Boston University, to expand on this topic for Venture Capital Dispatch. Nijhawan was kind enough to write the following essay, which urges US entrepreneurs to build products and services that can compete on price in both domestic and emerging markets.”

Here’s what Nijhawan wrote in response, offering $19 billion in ideas for new US ventures:

Why US Entrepreneurs Should Compete On Price

By Vinit Nijhawan

For 60 years the US has been the biggest market for virtually any product or service. Local entrepreneurs tend to have an advantage in big markets and as a result, US entrepreneurs have become accustomed to only competing in domestic markets.

“For 60 years the US has been the biggest market for virtually any product or service….No longer.”

No longer. Most growth markets are in emerging countries, and China is quickly becoming the largest market for many products and services: cars, cell phones, food, clothing, Internet connections, etc. The big difference between US consumers and emerging market consumers is their ability to pay equally for the same product or service. The result is new and established emerging market companies that are capturing share in their home markets by competing aggressively on price.

The lowest cost car, the Nano, comes from Tata in India. The lowest cost telecom equipment is from Huawei in China. The lowest cost cell phone service is from Bharti Airtel in India. Embraer in Brazil makes the lowest cost small jet; BYD in China sells the lowest cost electric car battery; and the mPesa service in Kenya is the lowest cost money transfer service. All these companies are now looking to expand to overseas markets based on the strength of their performance in their home markets.

“Most growth markets are in emerging countries, and China is quickly becoming the largest.”

As they lose the ability to compete on price, US companies have been going “up the value chain.” This strategy has been encouraged by US business schools, and by their spin-off management gurus. In other words, US companies are increasingly targeting the top of the pyramid, to borrow a phrase from CK Prahalad, the late business school professor and management guru. As they climb the pyramid, US companies are addressing smaller and smaller market niches that can afford to pay for unique products and services. For example, US medical device and drug companies are increasingly targeting uncommon diseases at exorbitant prices.

I recently sat in on a presentation at Boston University about a new drug-eluting device that was targeting lung cancer patients. The entrepreneur forecasted the US market at 5,000 units per year at $10,000 each. When I suggested that they consider countries with high lung-cancer incidence such as India and China to drive up volume at lower pricing, I was met with skepticism. Could patients in these countries afford the product? Would companies steal the idea, etc.?

“As they lose the ability to compete on price, US companies have been going “up the value chain.” This strategy has been encouraged by US business schools.”

It is time for US entrepreneurs to think about competing for the entire pyramid. This means that they have to address markets outside the US right from inception not after they have saturated domestic markets. If US companies can compete in mainstream emerging markets, they will be in a strong position to compete in developed markets as well. Only then will we match exporting countries such as Germany, where 40% of the GDP is export-driven, compared with 11% for the US.

So what strategy should entrepreneurs employ? First they need to pick industries where labor is a small component of end-user cost (eg., automobiles). Second they need to target global growth industries (eg., medical devices). Lastly they need to apply inventions and innovation primarily to reduce cost and then secondarily to add competitive features. In many cases US companies may be component suppliers with final labor-intensive assembly being done in emerging countries to be near markets and take advantage of lower labor costs.

There are several business models emerging to address both low-cost emerging markets and high-cost developed markets. One is to employ differential pricing: higher for developed country consumers and lower for emerging market consumers so the overall blended price allows decent profits. Developed country farmers, for example, provide large amounts of their output for food aid, which is essentially given away for free in emerging markets. The farmers get an advantage of volume production and the US government bears the subsidies to emerging markets. The other model is to create products for either market that have the same components but with features that meet local market needs.

With this in mind, we should establish a version of the X Prize, which creates incentives for entrepreneurs to come up with feature-busting products. The B Prize would encourage “Billion Something” products and services to address the 5 billion consumers in emerging markets. Here are some possible B Prize challenges:

Create an electric commuter car that will sell for $5,000 (with a 15% gross margin) that can become the No. 1 selling car on the planet (1.4 million annual units sold) within 10 years: a $7 billion company.

81 million people in the US have some form of cardio-vascular disease (CVD) with less than six million hospital discharges and $350 billion in medical costs, or $4,300 annually per patient. Create a chain of CVD Management Centers that reduces the annual cost of CVD management to $1,000 per patient and capture 5% of the US market in five years: a $4 billion company.

Create a national wireless network operator that will offer voice and data service at an annual ARPU of $100 (US average is $600), capturing 10% market share in five years (30 million subscribers) with a 10% EBITDA : a $3 billion company.

Create a national renewable energy electric utility that will output 50 billion kilowatt-hours by 2020: a $5 billion company.

It is time to harness the ingenuity of US entrepreneurs, our university research labs, and public policy in favor of exports to emerging markets to once again make the lowest cost products with the most desirable features.

“It is time for US entrepreneurs to think about competing for the entire pyramid.”

Prahalad, who tragically passed away last month, presented his “Fortune at the bottom of the Pyramid” ideas at a conference I organized in 2003. It really got me thinking about emerging market opportunities, and as a result, I started visiting India and China. I have witnessed a transformation in those markets as entrepreneurs have gained confidence in the rapid adoption of their homegrown products and services. Many of these entrepreneurs were trained in US universities. The playing field is leveling quickly, and US entrepreneurs must be price competitive globally to maintain our standard of living.